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Tickers in this Article: GEX, BP, DD, CORN, FUE, EWM, ADM, BG
As oil and energy prices rise once again toward the $100 a barrel mark, alternatives are back in the spotlight. From wind to nuclear power, alternative energy companies are seeing their share prices rise right along with energy prices. Funds such as the Market Vectors Global Alternative Energy ETF (NYSE: GEX) are becoming popular portfolio additions. While both solar and wind have their fans and proponents, one hated sector of the renewable energy market is looking like an interesting buy.

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Growing Gains

Biofuels and ethanol are again becoming darlings in the renewable energy sector, in spite of a poor performance through the global credit crisis. Global demand for ethanol is rising as consumers battle higher traditional fuel costs. Both emerging and developed nations have jumped on the bandwagon in promoting the adoption of such fuels. In Asia, China has begun the process of adding ethanol-blended fuel for transportation in five major cities, and Thailand has moved toward using an 80/20 blend of petroleum and ethanol. In Sweden, recent legislation requires that every gasoline station provide some sort of alternative fuel. Domestically, the U.S. Environmental Protection Agency increased the ethanol blending rate to 15% for vehicles built in 2007 or later. Adding to the demand, the Department of Energy has a goal of 30% of transportation fuels to be ethanol by 2030.

Ethanol makers are reaping the benefits from a favorable business environment. Higher prices for dried distiller grains, which are used as animal feed and are a byproduct of the fermentation process, and a 13-month low in natural gas costs are benefitting refiners. Ethanol refineries in Iowa are making an average of 27 cents for every gallon of fuel produced. This compares to a loss of 6 cents a gallon as recently as this past July. Similarly, plants in Illinois are making an average of 25 cents a gallon. Ethanol futures have gained nearly 47% since July 14 and are well above the psychological $2 level.

Running A Portfolio On Moonshine

With growing long-term energy demand and the focus on renewable sources rising, adoption of biofuels will continue. Even traditional energy companies are getting in on the act. BP (NYSE: BP) is bullish about the potential of various energy grasses and cellulosic ethanol. The company recently partnered with DuPont (NYSE: DD) to work on biobutanol, which can be made from wheat. With conditions looking up for ethanol producers and the biofuels market, investors may want to add some exposure to the sector.

The Corn Growers Association estimates that by 2015, nearly one-third of all corn grown, or 5.5 billion bushels, will go toward ethanol production. As the only pure play for corn prices, the Teucrium Corn Fund ETF (Nasdaq: CORN) has been on a tear lately as the grain has surged on various weather and demand issues. The ETF can be seen as a play on corn ethanol growth as well as overall food demand. Similarly, the ELEMENTS MLCX Biofuels ETN (NYSE: FUE) follows futures contracts on soybeans, corn, soybean oil and sugar.

Palm oil is quickly emerging as both a preferred cooking medium and a source of biodiesel. Some analysts predict that an oil price above $55 a barrel makes palm oil-based biodiesel a commercially viable option. Malaysia and Indonesia produce the bulk of the world's palm oil, and the iShares MSCI Malaysia Index (NYSE: EWM) includes top producers Sime Darby and IOI as top-five holdings.

Lastly, profitability for many ethanol producers may finally be here. Investors may want to focus their attention on commodities processors such as Archer Daniels Midland (NYSE: ADM) or Bunge (NYSE: BG), which include exposure to ethanol as part of an overall agriculture mix.

Bottom Line

As traditional energy prices resume their trajectory toward the $100 mark, renewable energy sources are once again in the spotlight. The ethanol and biofuels sectors have recently been buoyed by both increased demand and a favorable operating environment. Now may be the time for investors to consider the sector as a piece of their commodities and energy portfolio. The preceding funds and stocks are an easy way to add that exposure. (Before you buy into the hype, learn how the industry works and how to spot the winner. Check out Spotlight On The Solar Industry.)

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